Rising Star Buy: Google

This article is part of our Rising Stars Portfolio series.

Typically, my Rising Star Portfolio is designed to give investors stock recommendations based on macro themes and global insight. Today I'm diving into the tech world to do just that -- and I've decided to buy slightly more than $2,000 worth of Google (Nasdaq: GOOG) shares.

Google's fast facts

Source: Yahoo! Finance.

Google's core business
Anyone that uses the Internet is more than familiar with Google's main business. It's the leading search engine in the U.S., with more than 68% market share according to Hitwise, and it controls more than 60% of the market worldwide. Just for context, note that no other company even has 10%. That's what I call a wide economic moat.

Google makes the majority of its money when users click on advertising related to its searches. In fact, it generates more than 80% of its total revenue in a given year from per-click advertising. It also makes money from display advertising and other enterprise products such as email or office solutions. It's true that in recent years, Google has given up a few market share points to Microsoft's (Nasdaq: MSFT) Bing, but in the long run, it's much more likely that Microsoft's gains will come from smaller players like AOL or IAC's Ask.

Internationally, much attention has been given to Google's exit from China, where larger player Baidu (Nasdaq: BIDU) controls the vast market. But let's not forget about Google's other areas for growth. It is currently the No. 2 search engine in Russia, behind the recently IPO'd Yandex (Nasdaq: YNDX).  It also happens to be the No. 1 engine in arguably the two other most important developing countries, Brazil and India. These countries all have considerable growth in Internet penetration ahead of them. Only about 37% of Brazil has Internet access, while India has a strikingly low 6.9%. The U.S., for comparison, has a penetration of about 77%. Since Google already earns about 52% of its revenue outside the U.S., just imagine the opportunities it has in countries such as these.

Securing dominance elsewhere
About six years ago, Google purchased Android, a small mobile outfit that was working on advanced mobile software that was location-aware and could better track user profiles. Since that time, Google has used Android's status as a well-developed, free, open-source operating system to become the prominent leader in all smartphones, surpassing both Apple's (Nasdaq: AAPL) iPhone and Research In Motion's (Nasdaq: RIMM) Blackberry in terms of unit sales. According to researcher Gartner, in the first three months of 2011, Android became the clear No. 1 worldwide smartphone platform. Its market share shot up to 36%, versus only 9.6% the previous year. For comparison, Apple's worldwide market share stands at 16.8% of all phones sold.

Since Android is royalty-free, meaning the company collects no revenue from hardware manufacturers,  some analysts dismiss this part of the business as directly profitless, and therefore less significant. However, Android's dominance only solidifies the company's overall monopoly in search, and brings Google into the forefront of mobile advertising.

With the absolute explosion in smartphone, tablet, and mobile growth, it is even more important now more than ever to be able to compete in location-based search. With Google's products on every Android OS, and with Android on such a significant amount of smartphones, Google is almost sure to continue improving its data collection efforts. With more data comes more focused advertising. The more focused the advertising, the more money Google makes, and the enormous revenue stream continues chugging along.

Lastly, Android's success has created quite a network effect for the company. More and more users have Android on their phones, which encourages more developer interest, which leads to more apps and enterprise support for phones. To this end, this cycle only solidifies Android as the dominant mobile operating system, in much the same way Windows ascended to prominence on PCs. Although people can debate whether or not it's the best mobile operating system, the fact of the matter is that once Android becomes a standardized platform, it will become close to impossible to displace. Again, Google has found a way to make switching costs higher, and has begun developing people's habits in order to continue being the data king that it truly is.

Financials and valuation
Google has more than $36 billion in cash and short-term investments, with very negligible debt. It actually just announced plans to issue $3 billion in three-, five-, and 10-year notes, thanks to the terrific pricing it has received on those notes. According to Morningstar, Google plans to use the proceeds for general purposes, and to eliminate commercial borrowings. 

It's true that Google doesn't pay a dividend, and although it's not opposed to share buybacks, it certainly hasn't hinted at doing so at anytime soon. Despite that fact, the company has been rather frugal with acquisitions. With its enormous cash hoard, it can continue to invest in research and development, while retaining the ability to make a huge splashy purchase if the right one arises.

Considering some of the recent valuations of international search engines, Google is trading for dirt cheap prices. Yandex, for instance, trades at about 26 times sales and 55 times EBITDA. Baidu trades for 31 times sales and about 56 times EBITDA. China's Youku.com (Nasdaq: YOKU) is valued at about $4.5 billion, despite negative earnings. Of course, these markets have more room to grow, but still, these are sky-high valuations. 

In contrast, Google trades for only 13 times 2012 earnings, 11 times EBITDA, and five times sales. Google's five-year average P/E is 34.9, and today it's trading for about 20. Simply put, if people are willing to pay astronomical prices for search companies in emerging markets, I'm willing to pay a reasonable price for a company with world dominance and plenty of room to keep growing.

The Foolish bottom line
It's true that Google faces competition from social-networking sites like Facebook, Twitter, and LinkedIn. Their value is still somewhat unknown, but if LinkedIn's IPO is any indicator, investors obviously see a massive opportunity to unlock. Sure, Google's search dominance could fade a bit as other players make gains. The company might miss out on the incredible Internet explosion and improving GDP per capita in China. There are certainly risks associated with investing in Google. But with the company trading way below its historical average, and with all the opportunities in front of it, I'm not wasting any more time sitting on the sidelines -- I suggest you don't, either.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).